With a daily turnover running to over $6 trillion it’s impossible for the Forex not to have different shades of traders. These Forex traders have different strategies on how and when to enter and exit a position. Based on these Forex trading strategies, Forex traders are classified into four different categories; day traders, speculators, position traders, and swing traders. These categories are distinguished by the time that elapses between starting a trade and exiting it.
Forex Day Traders
As the name suggests, these are the Forex traders who take their trades daily and guarantee that none of their positions remain open overnight. Positions opened by a Forex day trader do not necessarily have to remain open all day. Sometimes these positions only last a few hours.
Forex day traders have a set goal of a minimum number of pips they aim to achieve. Once they achieve their goal, they close their positions. If a day ends and they have not met their objective, they leave their positions.
Due to its intraday Forex trading nature, day traders prefer trading sessions with high volatilities. To capitalize on intraday Forex trading, day traders trade large volumes of highly liquid and volatile currency pairs. Knowledge of the different Forex trading sessions around the world gives Forex day traders invaluable insight into volatility.
Forex day traders rely completely on technical analysis when placing their trades. Day traders use different charts showing time frames to establish the market trend before joining.
Let’s look at the following examples;
In the EUR/USD 30 minute chart above, the pair is trending down as the candlestick is crossing the 20 EMA. To confirm a downtrend before opening a trade, the Forex day trader will use a chart of 1 hour, as shown below.
EUR/USD 1-Hour Forex Day Trader Chart
This chart confirms that the pair is in a downtrend, giving the Forex day trader the signal to short the EUR/USD pair.
These are the Forex traders that open and close positions in seconds. Forex speculators do not keep Forex trades open for more than a few minutes.
Forex speculators aim to earn few pips in seconds, as many times as possible in a day. Similar to Forex day traders, Forex speculators prefer to trade during the most volatile periods to benefit from price spikes. If applied well, this trading strategy can allow Forex traders to make small but consistent profits throughout the day. It is worth noting that CAPEX.com Global Forex Broker provides all traders with negative balance protection.
Due to the fast paced nature of Forex traders, most Forex traders choose to use automated trading scripts.
Here’s an idea of how Forex speculators work;
EUR/USD 1-Minute Chart by Forex Speculators
Source: CAPEX.com WebTrader (capex.com)
From the EUR/USD 1-minute chart above, we can see that a Forex speculator has more than a dozen opportunities to open and close a trade.
Similar to Forex day traders, Forex speculators trade high volumes to maximize the value of a pip.
It is worth noting that Forex speculation could carry a higher risk as short-term spikes could result in significant losses.
Forex Position Traders
Position traders in the Forex market keep their positions open for the longest period, averaging months.
For Forex position traders, short-term fluctuations in the Forex market are of no consequence to them. Unlike Forex day traders and Forex speculators, position traders base their trading on rigorous long-term fundamental analysis, such as geopolitical factors. These fundamental analyzes are incorporated with long-term price action analysis to determine how a currency pair fluctuates.
By conducting rigorous geopolitical and economic analysis, Forex position traders can make an informed forecast about the demand for a currency. Suppose, hypothetically, a Forex position trader wants to trade a currency pair involving the GBP. The most significant geopolitical factor in the UK and the main driver of the future UK economy is the Brexit negotiations.
Therefore, the Forex position trader will review past and ongoing Brexit negotiations in an attempt to deduce how they will be concluded. If they establish that Britain will secure a favorable Brexit deal with the EU, the Forex position trader will be bullish on the GBP in the long run. Conversely, if the Forex position trader deduces that there is only a slim chance of Britain getting a favorable Brexit deal, then they would be bearish on the GBP in the long run.
Let’s see how long-term price action compares to short-term fluctuations;
GBP/USD 1-Month Chart of Forex Position Trader
If a Forex position trader was long GBP/USD in June 2020, their trade would still be profitable at the end of August 2020.
GBP/USD Daily Chart
Source: CAPEX.com WebTrader
In the daily chart above, you can see that the period between June and August 2020 had some declines. But in the long run, the Forex position trader still makes a profit, because minor daily or weekly fluctuations rarely have a significant impact on the long-term trend. Also, Forex position traders have well-funded accounts and can withstand short-term difficulties.
Forex Swing Traders
These are the traders who keep their positions open from a single night to several weeks. Similar to Forex position traders, Forex swing traders incorporate both fundamental and technical analysis when making their trades. However, Forex swing traders don’t get into this for the long haul.
Forex swing traders are interested in identifying currency pairs, which could show short-term price momentum. Therefore, they pay close attention to daily macroeconomic indicators as well as geopolitical trends.
As the name suggests, a Forex swing trader aspires to capitalize on price movements by timing their trades to capture extreme highs and lows. Therefore, when the market shows signs of a bullish swing, they go long. The swing trader goes short when the Forex market shows signs of a downtrend. They close their positions when the momentum dissipates;
GBP/USD 4-Hour Chart by Forex Swing Trader
Source: CAPEX.com WebTrader
Determining the type of Forex trader you want to become depends entirely on your trading goals and the amount of trading capital you have. We wish you good luck!